There were so many crosscurrents on Monday that potential buyers decided to stand aside. Many were stymied by lower crude oil prices, which fell under $80 a barrel, the U.S. dollar hitting a seven-year high against the yen, and mixed global economic reports.
On top of those uncertainties loom today’s midterm elections. Some politicians commented that we may not know the full makeup of Congress until some elections are settled in January.
The Dow hit a new intraday high before reversing to a small loss for the day. The real pressure for a pullback came from a reduction in the price of oil by Saudi Arabia for U.S. customers. This could cause a domino effect that would lower the price of U.S.-produced oil and create a deflationary trend.
So far, however, deflation does not seem to be a concern. The Institute for Supply Management’s main gauge for the factory sector rose more than expected in October.
This is in contrast to data coming from Europe and Asia. For example, Europe’s manufacturing sector showed only a small increase in October.
At Monday’s close, the Dow Jones Industrial Average was off 24 points at 17,366, the S&P 500 fell less than a point to 2,018, the Nasdaq gained 8 points at 4,639, and the Russell 2000 fell 3 points to 1,170.
The NYSE’s primary market traded 800 million shares with total volume of 3.5 billion. The Nasdaq crossed a total of 2 billion shares. On the Big Board, decliners slightly outnumbered advancers, and on the Nasdaq, decliners outpaced advancers by 1.2-to-1. Block volume declined on both exchanges.
The Dow transports have had a remarkable run this year, but technical signs of a possible adjustment lower have been accumulating. The first came Wednesday when the other indices forged ahead but the transports fell sharply.
Now we see another failure to hit a new high on a day of minor reversals for the Dow industrials and S&P 500. And the transports barely managed a new intraday high on Friday.
The Russell 2000 gapped from 1,159 to 1,167 Friday in an apparent breakaway gap. But breakaways are usually accompanied by a high-volume advance for several days after the break, and that did not happen Monday.
The move higher has also not resulted in the 50-day moving average turning up to cross through the 200-day, and thus negate the death cross from early September. And now we are confronted with a very overbought MACD.
Conclusion
A technically overbought situation exists following the breakout of the major indices, as well as the Russell 2000. These breakouts confirm that the major bull market is intact, so long-term investors should remain invested.
However, enough negative signals abound to make me very wary to enter new positions following the euphoria of the breaks to new highs. We have seen breakouts earlier this year that lacked follow-through, and I believe that we are observing the same situation now.
Even though the bulls on TV would have you taking new positions, I would caution that the only new positions should be in high-yielding stocks with very strong growth records (and there are few of those around) or short sales like my Trade of the Day.
This is no time for heroics at the top of a major trend. Wait for a better opportunity, which should come after the election — perhaps in mid-November.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
